Tag: repo rate

RBI Monetary Policy: Expect rates to remain stable for next six to eight months, say experts

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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This is going to be a Reserve Bank of India (RBI) policy that may be long remembered for its unexpected dovishness. The RBI didn’t give any rate cut, but it practically gave a promise that it may not have to hike rates for the next one year at least if not even longer.

PK Gupta, MD of SBI, A Prasanna, Chief Economist at ICICI Securities Primary Dealership, Manish Wadhwan of HSBC India, and Jayesh Mehta of Bank of America expressed their views on the policy.

Wadhwan said it has been more than expected a dovish policy from RBI. Wadhwan further added that the bond markets have recouped all the losses from December 31.

Mehta described this as a dovish policy, but he believes that till now the market expectation on inflation expectation versus RBI was on much of divergence.

PK Gupta of SBI said that he did not expect yields to rise the way they did.

A Prasanna said  he does not expect a pause in rate hike by RBI for the next 12 months.

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RBI keeps repo rates unchanged at 6%; key takeaways

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Reserve Bank of India kept its benchmark repo rate unchanged at 6.0% under the liquidity adjustment facility (LAF), in first policy meet of the 2018-19 financial year, in line with market expectations.

The Monetary Policy Committee (MPC) also kept the reverse repo rate under the LAF unchanged  at 5.75%, and the marginal standing facility (MSF) rate and the Bank Rate at 6.25 per cent.

The MPC’s decision is consistent with the neutral stance of monetary policy in achieving a medium-term target for consumer price index (CPI) inflation of 4 %.

Dr. Chetan Ghate, Dr. Pami Dua, Dr. Ravindra H. Dholakia, Dr. Viral V. Acharya and Dr. Urjit R. Patel voted in favour of the monetary policy decision. Dr. Michael Debabrata Patra voted for an increase in the policy rate of 25 basis points.

Read more here: Inflation worries, fiscal slippage cause RBI to keep repo rate unchanged at 6%

Key takeaways: 

Taking these factors into consideration, projected CPI inflation for 2018-19 is revised to 4.7-5.1 per cent in H1:2018-19 and 4.4 per cent in H2, including the HRA impact for central government employees, with risks tilted to the upside. Excluding the impact of HRA revisions, CPI inflation is projected at 4.4-4.7 per cent in H1:2018-19 and 4.4 per cent in H2.

The 6th bi-monthly resolution of 2017-18 in February projected CPI inflation at 5.1 per cent in Q4:2017-18; and in the range of 5.1-5.6 per cent in H1:2018-19 and 4.5-4.6 per cent in H2, including the HRA impact, with risks tilted to the upside.

Actual inflation outcomes in January-February averaged 4.8 per cent, largely reflecting the sharp decline in vegetable prices and significant moderation in fuel group inflation. The available information suggests that vegetable prices continued to moderate in March as well. Accordingly, inflation in Q4:2017-18 is nowprojected at 4.5 per cent.

There are now clearer signs of revival in investment activity as reflected in the sustained expansion in capital goods production and still rising imports, albeit at a slower pace than in January. 

Also read: RBI says investment activity, capital goods production boosts FY 19 GDP estimates

Growth has been recovering and the output gap is closing. This is also reflected in a pick-up in credit offtake in recent months. The large mobilisation of resources from the primary capital market should support investment activity further.

Global demand has been improving, which should encourage exports and boost fresh investment. On the whole, GDP growth is projected to strengthen from 6.6 per cent in 2017-18 to 7.4 per cent in 2018-19 – in the range of 7.3-7.4 per cent in H1 and 7.3-7.6 per cent in H2 – with risks evenly balanced.

International crude oil prices have become volatile in the recent period, with a distinct hardening bias in the second half of March, even as the increase in shale production was more than expected. This has adversely impacted the outlook for crude oil prices.

Also read: RBI meet: Uneventful policy, eventful press conference?

Indian domestic demand is expected to strengthen during the course of the year. Fourth, the statistical impact of an increase in HRA for central government employees under the 7th CPC will continue till mid-2018, and gradually dissipate thereafter.

Retail inflation, measured by the year-on-year change in the CPI, fell from a high of 5.1 per cent in January to 4.4 per cent in February due to a decline in inflation in food and fuel.

Food inflation declined by 120 bps in February, pulled down by a sharp decline in vegetable prices, especially of onions and tomatoes, along with continuing deflation in pulses. The fall in prices was also observed in other food components such as eggs, sugar, meat and fish, oils, spices, cereals and milk.

Inflation in respect of liquefied petroleum gas declined in line with international price movements. Furthermore, the rate of increase in prices of firewood and chips, and dung cake moderated.

CPI inflation excluding food and fuel remained unchanged at 5.2 per cent for the third consecutive month in February, after rising from its trough in June 2017.

Households’ inflation expectations, measured by the March 2018 round of the Reserve Bank’s survey of households, edged up for both three-month and one-year ahead horizons.

Manufacturing firms covered in the Reserve Bank’s Industrial Outlook Survey reported input price pressures and an increase in selling prices in Q4:2017-18, which are expected to continue in Q1:2018-19. Manufacturing and services firms polled by PMI also showed a rise in input and output prices in Q4.

Liquidity in the system moved between surplus and deficit during February-March 2018. From a daily net average surplus of ` 272 billion during February 1-11, 2018, liquidity moved into deficit during February 12-March 1, reflecting a slowdown in government spending and large tax collections.

After turning into surplus during March 2-15, the system moved into deficit again during March 16-22 mainly on account of quarterly advance tax outflows.

Anticipating the seasonal tightening of liquidity at the end of March, the Reserve Bank conducted four additional longer tenor (24-31 days) variable rate repo operations aggregating ` 1 trillion, apart from the regular repo operations.

In mid-March, additional liquidity of ` 1 trillion got released into the system through redemption of Treasury Bills issued under the Market Stabilisation Scheme (MSS) in April and May 2017

On the whole, the Reserve Bank injected ` 60 billion and ` 213 billion on a net daily average basis in February and March, respectively. The weighted average call rate (WACR) inched closer to the policy repo rate from 12 basis points below the policy rate in January to 7 bps in February, and 5 bps in March.

Merchandise export growth decelerated in January and February 2018, pulled down by a slowdown in exports of gems and jewellery, readymade garments and engineering goods.

As import growth continued to exceed export growth in January-February, the trade deficit widened. The current account deficit increased in Q3:2017-18, primarily on account of the higher trade deficit.

Net foreign direct investment moderated in April-January 2017-18 visà-vis the level a year ago. Foreign portfolio investors made net purchases in 2017-18, despite net sales in the wake of a global sell-off in February. India’s foreign exchange reserves were at US$ 424.4 billion on March 30, 2018.

Read the full text here: RBI keeps repo rate unchanged at 6%; CPI inflation medium-term target at 4%

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Inflation worries, fiscal slippage push RBI to keep repo rate unchanged at 6%

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Reserve Bank of India (RBI) kept the policy repo rate unchanged at 6% in the first bi-monthly meeting this financial year.  The reverse repo rate was also kept unchanged at 5.75%.

This meet, the RBI forecasted the inflation for Q219 to be in the 4.5-4.6% range.

The central bank had projected a CPI inflation rate of 5.1% for Q418 in the February meeting, and had expected the inflation for Q119 to be in the 5.1-5.6% range.

Domestic growth is rising and inflation is coming down, and in theory, the central bank would have cut the policy repo rate to pull up the growth further.

Also read: RBI says investment activity, capital goods production boosts FY 19 GDP estimates

Since the last meeting in February, the consumer price index (CPI) dropped to 4.4%, from 5.01% rate in January.

The inflation dropped largely because of the fall in the food inflation rate in that period.

Core inflation, however,  remains bloated, giving rise to risks of the increase in inflation in the near future.

The policy repo rate is the rate at which the Reserve Bank of India lends money to commercial banks. The rate is primarily used to control inflation.

Also read: RBI meet: Uneventful policy, eventful press conference?

If the economy is witnessing an inflation, the central bank will increase the rates to disincentivise borrowing and the other way round when the monetary authorities see the need to pull up the economy’s growth.

The status quo in the policy rate was predicted as the anxiety about a fiscal slippage and the deteriorating health of the banking sector remain a key worry.

Apart from this, the recent developments in the global economy remains a worry.  US President Donald trump’s trade war with China, the Fed rate hike, and rising crude oil prices can overpower India’s growth prospects.

Also read: Full text of the RBI policy meet

“The tone of the policy commentary suggests that despite several uncertainties surrounding the inflation trajectory, RBI is not in a hurry to change its neutral stance of monetary policy,”  Sunil Kumar Sinha, Director at India Ratings & Research, said.

For the impact of the repo rate on real estate  Shishir Baijal, Chairman & Managing Director, Knight Frank India, said:

“In the current interest rate cycle, we have touched the lowest level and it will come as no surprise if the cycle turns. Against this background, the impetus for stimulating housing demand does not lie on interest rate alone but on other reforms and steps taken by various stakeholders. Until such time the benefitsof these measures [implementation of RERA, among others] percolate across markets, the sector will continue to reel under pressure.”

Chanda Kochhar, MD & CEO, ICICI Bank said:

“The significant positive in the monetary policy was the downward revision of inflation projections.  The MPC also recognised that the structural reforms undertaken by the government and the pickup in credit growth are leading to a broad based cyclical improvement in the economy. The MPC has prudently voiced concerns about the possible interplay of domestic and global risk factors that could play out over the medium term. The announcement of regulatory measures like the mandatory loan component in working capital financing is a step in the right direction. Allowing non-residents into swap markets and introduction of Rupee swaptions would deepen the domestic derivative market, while also aiding product development to enable better risk management by domestic entities.”

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Morgan Stanley expects RBI to keep repo rate unchanged

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Morgan Stanley expects Reserve Bank of India (RBI) to keep its monetary policy rates unchanged in the upcoming meeting on April 4 to April 5, in a note.

The investment bank expects the status quo to remain unchanged, on grounds of India’s steady economic growth and inflation rates staying slightly below RBI’s projection.

The economic growth of the country is recovering, but is at an early stage, which requires the central bank to remain neutral on its monetary policy changes, the bank said.

The CPI inflation for Jan-Feb 2018 was 4.8 percent, below the the central bank’s estimate of 5.1 percent for the March 2018 quarter.

“In a nutshell, the incoming data on inflation are unlikely to give rise to any fresh concerns on the upside as regards the inflation outlook,” Morgan Stanley said.

The economic growth of the country has also started picking up but at a slow pace as the impact of demonetization and Goods and Services Tax (GST) implementation waned, the bank said.

Morgan Stanley expects the monetary policy committee (MPC) will maintain its neutral stance and will maintain a 5-1 vote, with Michael Patra, one of the key member of the committee, likely to reiterate his case for a 25 basis point rate hike.

If the inflation rates do not overshoot in relation to RBI’s target and the economic recovery is on a surer footer by then, the bank expects RBI to raise its rates by the fourth quarter of 2018.

However, Morgan Stanley sees a downside and expects the RBI to act early, if poor monsoon conditions and stronger-than-expected growth were to emerge.

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RBI may keep policy steady, likely to raise rates early next year, suggests poll

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Reserve Bank of India (RBI) may keep monetary policy steady in its April meeting and shift to a hawkish stance by the end of this year to raise interest rates in early 2019 due to inflation pressure, according to a Reuters poll of economists.

61 economists participated in the poll conducted by the news agency between 23 March and 28 March. All of them expected the RBI to hold the repo rate at 6% and the reverse repo rate at 5.75% in its upcoming policy meet, Reuters reported.

The agency in its poll also reported that 60% respondents expected the RBI to change its stance towards policy tightening by year-end. Four of the respondents thought the shift would come as early as its June meeting. Almost a third of respondents forecast the RBI will lift rates by the end of September.

The latest consensus is for the RBI to raise the repo rate and the reverse repo rate by 25 basis points in the first three months of 2019.

Also read: Morgan Stanley expects RBI to keep repo rate unchanged

“With growth-inflation data likely to be higher after April, we believe there is a risk of more hawkish rhetoric at meetings in June and beyond, including a change in policy stance,” wrote Sonal Varma, Chief India Economist at Nomura.

Despite a slowdown in growth through much of last year, India is on an upswing and reclaimed the top spot as the fastest growing major economy in the final quarter of 2017, outpacing China.

Inflation, on the other hand, has eased slightly, but has been still projected by the central bank above its 4% medium-term target in 2018. “The forecast for inflation suggests that after a temporary decline, which we have already seen, inflation will move slightly higher and this will force a hike,” said Dariusz Kowalczyk, senior economist for ex-Japan Asia at Credit Agricole CIB.

After hitting a low of 1.46% in June 2017, consumer price inflation steadily rose to a 17-month high in December. However, February’s inflation print showed inflation at 4.4%, giving the RBI a breather.

According to the central bank’s own projections, inflation is likely to average 5.1-5.6% for the first half of the 2018-19 fiscal year, before hovering around 4.5% for the remainder of the year.

Against a backdrop of government fiscal slippage, the RBI would focus on “price stability”, higher bond yields and sticky inflation near the upper band of its target, according to Vishnu Varathan, head of economics and strategy at Mizuho Bank.

“The fact that evidence of underlying inflation is picking up… should tilt them towards one rate hike to calibrate policy,” Mizuho’s Varathan said.

If the RBI does raise rates when expected, it would follow other major central banks which are already tightening policy.

The US Federal Reserve raised rates in March and is expected to follow it up with three more hikes this year, according to a separate Reuters poll.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow